November 18, 2010

 

China seeks more overseas grains amid supply shortages

China's demand for farm commodities will rage unabated in the next few months as rising consumption and tight supplies will defy its new moves to soak up liquidity and dampen food prices.

 

Global prices of grains, cotton and oilseeds have slid from record or multi-year highs in the past week as policy makers in China, the world's biggest importer of soy and cotton, take steps to rein in consumer prices running at a 25-month high.

 

But as consumption outstrips domestic supplies, China is likely to ship in even larger volumes of soy and cotton in the months ahead, and is widely expected to buy more corn from the international market, analysts said.

 

"Irrespective of what the Chinese authorities do to curb rising food prices, the core issue needs to be addressed and that is that production needs to exceed demand in order to rebuild global stocks to put a downward pressure on prices," said a commodity strategist at Commonwealth Bank of Australia.

 

Consumer price inflation in China spiralled to a 25-month high in October, with prices rising 4.4% from a year earlier. Food, which makes up about a third of China's consumer price index, led the way, climbing 10.1%.

 

This has spurred authorities to take several steps to tame inflation and deter speculation. After a meeting on Wednesday (Nov 17), China's State Council, or cabinet, announced plans such as intervening to control prices when necessary and releasing state reserves to hold down prices. It also singled out grain, oil, sugar and cotton as markets it sought to cool.

 

Chicago Board of Trade front-month corn jumped to its highest in more than two years this month, while soy scaled a 26-month top, buoyed by a squeeze in world supplies and strong demand, although prices have dropped since last week on talk of China's measures to check inflation.

 

In the Chinese market, Dalian corn futures last week climbed to an all-time high of RMB2,440 (US$367) a tonne and Zhengzhou cotton surged to historic highs of RMB33,720 (US$5,076) a tonne last week.

 

China - whose soy imports jumped 26% to record highs in the first 10 months of this year, surpassing the total for all of 2009 - could be in the market to take more than five million tonnes of corn in 2011, say some analysts, potentially making it the world's fifth largest importer.

 

The country is already the world's top importer of cotton.

 

Rising demand has also dampened the government's ability to control prices by releasing stockpiles of cotton, corn and sugar into the market this year. China keeps the size of its reserves secret.

 

Analysts and traders say China's state corn stocks could have dropped below 10 million tonnes, or less than a month's supply, following the release of some 45 million tonnes since the beginning of 2009.

 

Similarly, reserves of cotton could be as low as 300,000 tonnes, less than 5% of annual production, and sugar could stand at 200,000 tonnes, around 2 weeks of supply.

 

"We believe the government's stocks are very low, which has weakened the government's power to control the price rises," said a senior futures researcher.

 

Growing feed demand, mainly from China, should lift US grain futures far above current prices within three to five months, a US analyst said.

 

And the country is scouting for new potential sources.

 

Argentina's farm minister said last week his country was in talks with China to export corn to the Asian country, which does not currently buy Argentine corn due to trade issues and Beijing's curbs on genetically modified varieties.